A "Qualifying Free Zone Person" is subject to Corporate Tax at 0% only on its "Qualifying Income," under Clause (2) of Article (3) of the Corporate Tax Law, while any other income that is not Qualifying Income is taxed at 9%. Article (18) sets the conditions for acquiring Qualifying Free Zone Person status, while Cabinet Decision No. (100) of 2023 sets out the categories of Qualifying Income in detail.
Conditions for a Qualifying Free Zone Person (Article 18)
Under Article (18), a Free Zone Person is a "Qualifying Free Zone Person" if all of the following conditions are met:
- It maintains adequate substance in the State.
- It derives Qualifying Income as specified in a decision issued by the Cabinet.
- It has not elected to be subject to Corporate Tax under Article (19) of the Law.
- It complies with Articles (34) and (55) of the Law, on the arm's length principle and record-keeping.
- It meets any other conditions the Minister may prescribe.
If the person fails to meet any of these conditions at any time during a Tax Period, it ceases to be a Qualifying Free Zone Person from the beginning of that entire Tax Period.
Categories of Qualifying Income Under Cabinet Decision No. (100) of 2023
Cabinet Decision No. (100) of 2023 sets out categories of Qualifying Income, including:
- Income derived from transactions with another Free Zone Person, other than income from Excluded Activities.
- Income derived from transactions with a Non-Free Zone Person, but only in respect of Qualifying Activities that are not Excluded Activities.
- Income derived from owning or exploiting Qualifying Intellectual Property, subject to conditions set out in the same Decision.
The Decision also sets "de minimis requirements" that are met if a Qualifying Free Zone Person's non-qualifying revenue does not exceed a percentage or an amount set by the Minister, whichever is lower, without stating a specific figure for that percentage or amount within the operative text of that Article itself.
Duration of the Tax Incentive Period and Its Cap
Clause (4) of Article (18) provides that the 0% rate applies to a Qualifying Free Zone Person for the remainder of the tax incentive period under the Free Zone legislation in which it is registered, and that period may be extended by a Cabinet decision, provided that any extended period does not exceed 50 years.
The Legal Basis for the 0% and 9% Rates for a Qualifying Person
Clause (2) of Article (3) of the Corporate Tax Law expressly provides that Corporate Tax is imposed on a Qualifying Free Zone Person at 0% on Qualifying Income, and at 9% on Taxable Income that is not Qualifying Income under Article (18) and any Cabinet decision issued in this respect. This means that losing Qualifying Free Zone Person status, or earning income falling outside the Qualifying Income categories, does not necessarily mean the person's entire income becomes subject to 9%; that consequence is limited to the non-qualifying portion of the income only.
Illustrative Example
If a Qualifying Free Zone Person earns income from a transaction with another Free Zone Person that is the actual beneficiary of the service, and the activity is not an Excluded Activity, that income is Qualifying Income taxed at 0%. If the same person instead earns income from an ordinary commercial activity with a party outside the Free Zone that does not fall within a Qualifying Activity, that income is taxed at 9% as non-Qualifying Income, while the rest of its Qualifying Income remains taxed at 0% unaffected.
Legal References
- Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses — Article (18).
- Cabinet Decision No. (100) of 2023 on Determining Qualifying Income for the Qualifying Free Zone Person for the Purposes of Federal Decree-Law No. (47) of 2022 on the Taxation of Corporations and Businesses — Articles (3) and (4).
For questions about your specific situation, you can ask the UAE Tax & Legislation Helper on Helpers, or consult a licensed chartered accountant.